⚠️ Universal Credit (UC) is gradually replacing tax credits, and some other social security benefits. Universal credit is now available across the UK and HMRC state that it is no longer possible for anyone to make a brand-new claim for tax credits. Instead, people are expected to claim UC or pension credit if appropriate. Existing tax credit claimants can continue to renew their tax credits and/or add extra elements to their claim. See our tax credit page for more information. Our understanding is that the majority of existing tax credit claimants will move to either universal credit or pension credit. It is expected that the majority of people who have not reached state pension age, and who continue to claim tax credits, will be invited to move to UC by the end of 2024. You can find out more about this in our universal credit section.
What counts as income for tax credits?
The amount and type of income you (and your partner, in a joint claim) have will affect how much tax credits you might get. The rules are the same whether you are claiming child tax credit (CTC), working tax credit (WTC), or both. This page tells you what counts as income for tax credits.
The four steps
The legislation, like a set of do-it-yourself carpentry instructions, sets out a series of four steps to work out tax credit income. We set out the steps below in order to give a complete picture.
- Add together:
- pension income
- investment income
- property income
- foreign income
- notional income.
If the total is £300 or less, ignore it. If it is more than £300, subtract the first £300. Note that there is no notional capital rule as for social security benefits – only the income from savings is counted.
- Add together:
- employment income
- social security income
- student income
- miscellaneous income.
- Add together the amounts in Step 1 and Step 2.
- Add trading income to – or if there is a loss subtract trading loss from – the total in Step 3.
- bank conversion charges or commission
- gross gift aid, payroll giving or give as you earn donations made in current year
- gross pension contributions (note: if your pension scheme uses a net pay arrangement, contributions paid out of salary are already taken into account in the P60 taxable income figure, so should not be deducted again).
The rest of this page gives some basic information about income and tax credits. You can find more detailed information about each category of income on our website for advisers.
What does annual income mean?
Tax credits are worked out using yearly rates, so you need to provide an annual income figure. HM Revenue & Customs (HMRC) use the tax year as the basis for their calculations so any annual income figures you have to provide should, therefore, be the same, that is from 6 April one year to 5 April the next year.
Even if your claim ended part way through the year, or started part way through the year, HMRC still need you to provide your annual income for the tax year. The only exception to this is where you have claimed universal credit in the same tax year and so in-year finalisation rules apply.
Where can I find my annual income figure?
If you are an employee, the end of tax year statement you get from your employer (a P60) should give you the information you need for your tax credit claim. The figure you need is the gross income amount, before tax and National Insurance.
If you get benefits from the Department for Work and Pensions (DWP), you should get a statement of taxable benefits at the end of the tax year.
If you are self-employed, you should normally use the business profits (or loss) figure from your Self Assessment tax return. (Note: special rules apply to the way the business profits (or loss) figure is worked out for tax credits for anyone covered by the basis period reform rules so that any amount of transition profits for the tax year 2023/24 under basis period reform are disregarded).
Do I include maintenance payments?
Any maintenance payments you get, whether for a child or yourself, are ignored for tax credits.
Do I include statutory payments while I am off work?
Statutory sick pay is counted in full as earnings.
Statutory maternity, paternity, parental bereavement, shared parental leave and adoption pay is also counted as earnings, but only the amount over £100 a week is taken into account.
Do I include payments I get for fostering or looking after children?
Qualifying care receipts paid by local authorities and similar agencies are only taken into account in working out tax credit income to the extent that they are taxable. Therefore, if you use the simplified method for working out your profits for income tax Self Assessment, your income from caring for tax credits purposes will be the amount on which you pay income tax. If your care receipts are wholly covered by your tax-exempt amounts, then none of your income from caring is counted in assessing your tax credits entitlement.
Also, if you use the standard method, your caring income for tax credits will be the same as your taxable profits after deductions. You can find out more about taxable income for foster carers and shared lives carers in our disabled people and carers section.
Do I include benefits?
Most, but not all, taxable state benefits should be included as social security income. However, income-based Jobseekers Allowance although taxable is not counted as income for tax credit purposes. Carers Allowance Supplement – available to those living in Scotland only – is also taxable but is not counted as income for tax credit purposes. Not all benefits are taxable; see our page on State Benefits for more information.
In this context – taxable benefits means benefits that are liable to tax, it does not matter whether you individually pay tax on them or not.
⚠️ Important: the rules on what counts as income can be quite complex, so check the information on GOV.UK and if you are still not sure what to include, ring the Tax Credit Helpline.
Do I include cost of living payments?
The Government cost of living payments are ignored for tax credits.
Do I include deferred state pension?
The amount of state pension that you defer should not be included as income for tax credits while it is being deferred. You only include your state pension as income when you actually claim it. Note though, that the rules about deferred state pension are different for universal credit , pension credit and other means tested benefits and you should seek welfare rights advice if claiming any other benefits.
If you reached your state pension age before 6 April 2016 and deferred receiving your state pension for at least 12 months in a row, you can choose to receive a one-off lump sum payment in addition to your regular state pension when you later decide to stop deferring. This lump sum will also count as pension income for tax credits purposes in the year in which it is taxable.
You can find out more about state pension deferral in our pensioners section
Changes to property income
From 6 April 2017, there were changes to how property income is calculated for tax purposes for residential landlords. The change basically means that there will be a restriction on how much you can deduct as expenses for finance costs including mortgage interest. These tax changes were introduced gradually and since 2020 no expense deduction has been allowed for finance costs and instead you will need to claim a tax relief instead. See GOV.UK for more information.
However, for tax credits, you will need to continue to calculate your income as you did before 6 April 2017. This means that you can deduct finance costs as an expense when working out your profit for tax credit purposes only. While this is better for tax credit claimants, it does mean that you will need to work out a figure for tax credits that is different to the figure you will need to put on your tax return as your taxable property income.
I’ve received a coronavirus grant – does it affect my tax credits?
Numerous different grants and payments were paid out by UK government, devolved governments (in Scotland, Wales and Northern Ireland) and Local Authorities in response to the Coronavirus pandemic. Some of these payments count as income for tax credits, some are disregarded.
We have published detailed guidance on the tax and national insurance position of these payments.
⚠️ If you have received any coronavirus related payments you must check – for each different payment:
- Whether the payment counts as income for tax credit purposes or can be disregarded
- If it does count as income, how it should be declared for tax credit purposes on your form. Some of these payments may already be included in your P60 income figure so you must check carefully.
Although tax credit rules usually follow the tax rules, so if a payment is taxable then it is likely to be income for tax credit purposes, there are exceptions to this rule and so you should not assume that if it is taxable it counts as income for tax credit purposes.
Our current understanding is that the following grants count as income for tax credit purposes:
Self-employment Income Support Grant (SEISS)
We have published some detailed guidance on how to declare SEISS grants on your tax return. For self-employed individuals the first 3 SEISS grants are taxable in the 2020/21 tax year, no matter what accounting period you use. This means they will be counted as income for tax credits in the 2020/21 tax year. Grants 4 and 5 will be taxed in the tax year they are received, which should be 2021/22 tax year and therefore will count as income for tax credits in 2021/22 tax year.
There are special rules on how the grants are taxed and how to declare your SEISS grants on your tax return if you are an individual partner in a partnership – depending on whether the grant was paid into the partnership and treated as partnership income or whether you received it as an individual partner.
For tax credits, you need to be careful not to double count your SEISS grants. As explained in our article on where to put the grant on your tax return, it will be included in your taxable profit figure. Usually for tax credits, you will take the figure from a certain box on your tax return – depending on which return you fill in (although there are some different rules if you use averaging as a farmer or creative artist):
If you are an individual and complete the self-employment (short) pages – you will usually declare the figure in box 28 + any figure in box 30 as your self-employed income for tax credits. If you have correctly declared your SEISS grant on your tax return, it will already be included in the box 28 figure.
If you are an individual and complete the self-employment (full) pages – you will usually use the figure in box 73 plus any figure in box 75 for tax credit purposes. If you have correctly declared your SEISS grant on your tax return, it should already be included in the box 73 figure.
If you are in a partnership and you received the grant as an individual partner then you will usually use the figure in box 16 of the partnership supplementary pages (both short and full) + any figure in box 19 as your self-employed income for tax credits. If you have correctly declared your SEISS grant on your tax return, it will already be included in the box 16 figure.
If you are in a partnership and the SEISS grant was paid to the partnership and distributed to partners based on the partnership agreement, then the SEISS grant will be declared as part of the partnership’s turnover on the partnership return. This will mean your share of it will be taken across to your own partnership tax return supplementary pages as taxable income. You will usually use the figure in box 16 of the partnership return (both short and full) + any figure in box 19 as your self-employed income for tax credits. If you have correctly declared your SEISS grant on your tax return, it will already be included in the box 16 figure.
⚠️ Please note: the above covers most situations, although there may be a few instances not covered by this general information, for example if you received a SEISS grant in 2022/23 and need to include it in your 2022/23 tax return. But in all cases, if you get tax credits, you need to make sure the SEISS grant is included in your income figure that you declare for tax credits.
If you want to use the trading allowance, it cannot be used against SEISS grant income for tax purposes (or tax credit purposes) – see our guidance for more information.
If you need to repay part or all of a SEISS grant you have received it can affect your tax credit award. See our guidance for more information.
Small business grants and hospitality and leisure grants
These grants were paid by local authorities.
If you are self-employed, then the payments will form part of your taxable trading income on your tax return following normal accounting rules. If you have reported the grants correctly on your tax return (usually box 10 on the self-employment (short) pages and box 16 on the self-employment (full) pages), then you should use the boxes detailed above for SEISS, as that will ensure the grants flow through as income into the correct year for tax credits.
Coronavirus job retention scheme
If you are self-employed and received payments from the job retention scheme to help with your employee’s wages, then these payments will form part of your taxable trading income on your tax return following normal accounting rules. If you have reported the grants correctly on your tax return, (usually box 10 on the self-employment (short) pages and box 16 on the self-employment (full) pages) then you should use the boxes detailed above for SEISS, as that will ensure the grants flow through as income into the correct year for tax credits.
⚠️ NOTE: If you are an employee who was furloughed under the job retention scheme, you need to declare your employed income from your P60 in the usual way. Payments under the job retention scheme were made to employers, for them to use those payments for wages/salary expenditure for their employees. So, employees did not directly receive job retention scheme payments themselves but instead they received partial or full wage/salary payments from their employer. The fact that your employer might have received payments under the job retention scheme doesn't affect your tax position as an employee and doesn't affect your income for tax credits.
Also, if you are an individual who received a JRS grant to pay an employee – for example a nanny then you do not need to declare this grant for tax credits as it is not taxable.
Bonus payment to health and social care staff
The following payments were made to certain health and social care staff:
Scottish £500 payment for health and social care staff
Wales – £735 payment for social care workers and an earlier £500 payment for care home and domiciliary workers
Northern Ireland – HSC staff recognition payment
Our understanding is that these payments were made through the payroll and are therefore subject to tax and NI. They also count as income for tax credits. However, you must be careful not to double-count them. They will already be included in your P60 figure and if HMRC have used data from the tax system to show your income on your renewal notice, the bonus should already be included.
Enhanced statutory sick pay scheme – Wales only
This scheme is only available in Wales. Our understanding is the enhanced sick pay payments were/are made through the payroll and are therefore subject to tax and NI because they are treated as any other earnings. They also count as income for tax credits. However, you must be careful not to double-count them. They will already be included in your P60 figure and if HMRC have used data from the tax system to show your income on your renewal notice, the bonus should already be included.
Other coronavirus support payments
We have listed below the coronavirus payments that are disregarded as income for tax credit purposes in the legislation.
However, there are likely hundreds of different coronavirus related payments. If not specifically excluded, the payments may count as miscellaneous income for tax credit purposes unless they were received as part of your self-employed trade in which case they may count trading income. You should carefully check any other payments with HMRC.
The following coronavirus related payments are not counted as income for tax credit purposes:
Payments, in cash or vouchers, in lieu of free school meals.
Payments in connection with emergency volunteering leave under the Coronavirus Act 2020.
Any payment made under the NHS Test and Trace Self-Isolation Payment Scheme established on 1 September 2020, or the Test and Trace Support Payment Scheme established on 28th September 2020 in England. Payments from schemes in other parts of the UK for the purpose of providing financial support to people who are required to self-isolate due to coronavirus and cannot work from home are also disregarded as income. However, these payments are taxable, but not subject to national insurance. If you are self-employed, you may need to deduct the amount of any test and trace payments from your taxable profit figure before declaring it for tax credit purposes. This is because test and trace payments are taxed as income of your business but they are not counted as income for tax credit purposes.
Any payment made under the Covid Winter Grant Scheme (England) or the COVID local support grant (in respect of England) or any other corresponding scheme in Northern Ireland, Scotland or Wales for the purpose of providing financial support to families and vulnerable individuals to assist with the cost of food and utilities over the same period. The Covid Winter Grant scheme should not be confused with some winter business grants that were paid by some local authorities.
The £500 payment made to certain working households in receipt of tax credits.
Payments made under the NHS and Social Care Coronavirus Life Assurance Scheme are not counted as income, instead they are capital (and so only any interest will potentially count as income for tax credits).
HMRC have published some information on the GOV.UK website. Please note, however, this information appears to only list some payments that should be taken into account but it does not explain how to take the payments into account. If you are unsure about where to include a payment in your income figure for tax credits, we recommend you contact HMRC directly to check with them.
If you have claimed tax credits and then claim universal credit in the same tax year, your tax credits award will stop and HMRC will finalise your award in-year (that is, before the end of the tax year). If this happens, HMRC will write to you and explain what you need to do. It is important to note that the income figures you provide will be for the shortened award period and not for the full tax year. You can read more about this in our stopping tax credits section.
This page gives an overview of what counts as income for tax credits. For more detailed information, visit the following pages on our website for advisers.